Record-low interest rates are not just helping homeowners save money on their existing loans; they are also contributing to a trend in shorter loan terms all together. According to Freddie Mac, more refinancers changed the term of their loan in addition to the rate on the loan in the first quarter of this year than any time since 2004. 34 percent of people refinancing home loans opted for a 20- or 15-year mortgage in place of their old “30-year fixed.” And since rates are so low, monthly payments may rise only slightly or not even at all when the terms are shortened. Some lenders like Quicken Loans are even allowing borrowers to select unconventional terms like eight or 13 years for their mortgages. And while conventional wisdom says that you should keep your payments as low as possible on your house and invest the money you save, many families are opting to pay down the mortgage instead of risking the money on other investments like the stock market or low-interest certificates of deposit or Treasury securities. As a result, the “mortgage-burning” party may be a more frequent invite in the next decade.
Of course, refinancing does come with some pretty strict terms these days. To get optimum rates and term limits on your loan, you will need a credit score of around 720 and at least 20 percent in home equity. Nearly half of all homeowners currently have less than 20 percent equity in their homes.
Do you think that the classic 30-year fixed-rate mortgage is becoming obsolete?
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